Construction firms are likely to face a significant squeeze to their finances, when new rules on how VAT is collected by the building and construction industry – called the Domestic Reverse Charge (DRC) – come into effect from 1st October this year.

The changes will require customers to pay VAT directly to HMRC, rather than to suppliers, meaning construction firms could potentially see a sharp drop in income when the new rules come into force.

The guidance published by HMRC stipulates that the rule change will only apply to firms that are registered in the UK, who provide “specified services that are reported under the Construction Industry Scheme”, and the DRC will not apply to customers who are not registered for VAT in the UK.

With the standard rate for VAT currently at 20%, and with many construction firms counting on VAT as part of their working capital, the rule changes will hit some businesses quite hard and could potentially cause a spike in insolvencies within the sector.

The chair of the Federation of Master Builders (FMB), Brian Berry, has suggested in a letter to the government that they should delay the changes for a minimum of 6 months, to avoid a “negative economic impact”, and to give sufficient time to improve awareness of the changes across the construction industry.

Berry further commented that in a survey of the FMB’s 8,000 small and medium-sized members, “69% reported that they were not aware of the changes at all”, and of those who were aware, “67% do not have the necessary measures in place to ensure their business is ready.”

While this is not good news for construction firms, there are a number of measures businesses can take to prepare. Contacting BBR, your accountant or other professional advisers will help ensure your firm can plan ahead, and is therefore better prepared for the DRC.

Isobel Brett, Director of Bretts Business Recovery, commented “This rule change could have serious ramifications for some. Those already suffering cashflow issues could find themselves out of business. Action needs to be taken now to ensure adequate working capital is in place.”

If you are concerned about the DRC and the financial implications for your business, please contact BBR who can assist and advise you in preparing for the rule changes when they come into effect from 1st October.